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5–2
Chapter Learning ObjectivesAfter studying this chapter you should be able to:
1. Discuss the nature of entrepreneurship.
2. Describe the role of entrepreneurship in society.
3. Understand the major issues involved in choosing strategies for small firms and the role of international management in entrepreneurship.
4. Discuss the structural challenges unique to entrepreneurial firms.
5. Understand the determinants of the performance of small firms.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Nature of Entrepreneurship
• Entrepreneurship–The process of planning, organizing, operating, and
assuming the risk of a business venture.
• Entrepreneur–Someone who engages in entrepreneurship.
• Small Business–A business that is privately owned by one individual
or a small group of individuals.–It has sales and assets that are not large enough to
influence its environment.
5–3
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The Role of Entrepreneurship in Society
• Research Findings:–Most new businesses fail within the first few years of
being founded. –More than 97% of U.S. businesses are small with
fewer than 100 employees.–Most U.S. workers work for small businesses.–The majority of small businesses are owner-operated.–Small business is a strong presence in both mature
and emerging economies.–Small business has a strong effect on job creation,
innovation, and is important to big businesses.
5–4
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5–5
FIGURE 5.1 The Importance of Small Business in the United States
Approximately 86 percent of all U.S. businesses employ fewer than 20 people; another 11.7 percent employ between 20 and 99 people. In contrast, only about 2.1 percent employ between 100 and 400 workers, and another 0.2 percent employ 500 or more.
24.5 percent of all U.S. workers are employed by firms with fewer than 20 people; another 29.6 percent work in firms that employ between 20 and 99 people. 25.5 percent of U.S. workers are employed by firms with 100–499 employees, and another 20.3 percent work for businesses that employ 500 or more total employees.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Entrepreneurship’s Role in Society
• Small Businesses’ Role in Job Creation–Create many of the new jobs in the U.S.–Dominate sectors that have added the most jobs.–Represent 92% of all U.S. exporters.
• Innovation–Major innovations are as likely to come from small
businesses as from large firms.–Much of what is created in the high-technology sectors
comes from start-up companies.
5–6
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5–7
FIGURE 5.2 Representative Jobs Created and Lost in 2009
Aetna
Wal-Mart
Home DepotVerizon
Communications
Sprint Nextel Corp.
Johnson & Johnson
IBM
Merck
Pfizer
Caterpillar
–1,240
–1,450
–7,000–8,000
–8,000
–8,900
–10,000
–16,000
–19,500
–20,000
Whole Foods
Market
Microsoft
T-Mobile
Nordstrom
Cisco Systems
Deloitte
Accenture
Edward Jones
+8,570
+7,130
+3,586
+3,550
+2,421
+2,412
+2,311
+2,176
+2,1290
JOB LOSSES
JOB GAINS
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Entrepreneurship’s Importance to Big Business
• Most products made by large manufacturers are sold to customers by small businesses.
• Small businesses as suppliers provide large firms with services, supplies, and raw materials.
• Large businesses outsource many routine business operations such as packaging, delivery, and distribution to small businesses.
5–8
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Strategy for Entrepreneurial Organizations
5–9
Emphasizing distinctive
competencies
Gaining first mover advantage
Choosing an industry in which
to compete
Basic Strategic Challenges
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5–10
FIGURE 5.3 Small Business (businesses with fewer than 20 employees) by Industry
Services are the fastest growing
segment of small-business enterprise.
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5–11
FIGURE 5.4 Economies of Scale in Small-Business Organizations
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Strategically Utilizing Distinctive Competencies
Identifying new markets
Taking first-mover advantage
Identifying niches in current markets
Seeking CompetitiveAdvantage
5–12
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Emphasizing Distinctive Competencies
• Identifying niches in an established market–Finding part of a market not currently being exploited
can offer a competitive advantage.
• Identifying new markets–Transferring an existing product/service to a new
market can create new industries/products/services.
• Taking first-mover advantage–Exploiting a market opportunity before any other firm
does can result in a competitive advantage.
5–13
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Management Challenge Question
• What would you caution an entrepreneur about the dangers of taking first-mover advantage?
5–14
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Writing a Business Plan
• Business Plan–Is a document that summarizes
business strategy and structure.–Should include:
• Business goals and objectives.• Strategies used to achieve these
goals and objectives.• A plan of how the entrepreneur
will implement these strategies.
5–15
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Entrepreneurship and International Management
• There is potential for expansion and growth in foreign markets.
• While there are risks, entering a foreign country’s market can be a real catalyst for success.
5–16
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Starting a New Business
• Buying an Existing Business–Business has a proven ability to draw customers
and make a profit.–Networks are already established.–Negative: New owners inherit existing problems.
• Starting from Scratch–Avoids problems associated with previous owners.–Allows freedom to choose suppliers, equipment,
location, and workers.–Negative: More business risk and uncertainty.
5–17
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Identifying a Business Opportunity
Who are my customers?
Where are they?
At what price will they buy my
product?In what quantities will
they buy?
Who are my competitors?
How will my product differ from
those of my competitors?
5–18
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Financing the New Business
Venture Capital Companies
Small-Business Investment Companies
SBA Financial Programs
Sources of New Business
Financing
PersonalResources
StrategicAlliances
Lenders
5–19
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Financing the New Business
• Personal Resources– Using own money and
money borrowed from friends and relatives to finance the business.
• Strategic Alliances– Partnering with established
firms such as suppliers in a mutually beneficial relationship.
• Lenders– Obtaining funding from
traditional lenders (e.g., banks, independent investors, and government loans).
• Venture Capital Companies– Groups of small investors
who provide capital funds to small high-growth potential start-up firms in exchange for an equity position (stock) in the firms.
5–20
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Financing the New Business (cont’d)
• Small-Business Investment Companies (SBICs)–Are investor-owned companies that borrow money
from the SBA to loan to small business with high growth potential.
–Minority Enterprise Small-Business Investment Companies (MESBICs) specialize in financing businesses owned by minorities.
• SBA Financial Programs–Provide assistance (e.g., SBA-guaranteed loans) for
small businesses unable to get private financing at reasonable terms.
5–21
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Seeking New Business Advice
Advisory Boards
Management Consultants
Small Business Administration
Networking with Others
Sources of Management
Advice
5–22
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Sources of Help for Entrepreneurs
• Boards of directors• Management consultants• SBA• Trade associations• Small-business networks• Pooling
• Accountants• Bankers• Lawyers• Insurance agents• Computer consultants
Management Help Professional Help
Outside Help
5–23
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Franchising
• Franchising Agreement–Operation of the franchised business
by the entrepreneur (the franchisee) under a license by a parent firm (the franchiser).
–The entrepreneur pays the parent firm for use of trademarks, products, formulas, and business plans.
5–24
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Franchising (cont’d)
• Advantages–Reduced financial risk of new business success
through experience provided by franchiser.–Training, financial, and management support by
franchiser.
• Disadvantages–Start-up fees to purchase franchise.–Limitations of franchise (market area, product,
customers).–Loss of independence due to imposed operational
controls of franchiser.
5–25
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Management Challenge Questions
• What characteristics of a franchisee would an entrepreneur/franchisor likely find most attractive?
• What aspects of this relationship could be detrimental to either party?
5–26
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5–27
FIGURE 5.5 Business Start-Up Successes and Failures
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The Performance of Entrepreneurial Organizations
Crossovers to small business by former large-business
employees
The emergence of E-commerce
Trends in New Business Start-Ups
Better survival rates for small businesses
Increased entrepreneurial opportunities for minorities
and women
5–28
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Entrepreneurial Success and Failure
• Reasons for Failure– Managerial incompetence/ inexperience of the entrepreneur.– Neglect in not devoting sufficient time and effort to the business.– Weak control systems that do not warn of impending problems.– Insufficient capital to sustain the business until it starts to turn a
profit.
• Reasons for Success– Hard work, drive, and dedication by the entrepreneur.– Careful analysis of market conditions provides insights about
business conditions.– Managerial competence through training and experience
contributes to success.– Luck sometimes plays a role.
5–29